Gamma Distribution

Definition: Gamma distribution is a distribution that arises naturally in processes for which the waiting times between events are relevant. It can be thought of as a waiting time between Poisson distributed events.

Probability density function: The waiting time until the hth Poisson event with a rate of change λ is

For , where k = h and θ = 1 / λ, the gamma probability density function is given by

where

e is the natural number (e = 2.71828…)

k is the number of occurrences of an event

if k is a positive integer, then Γ(k) = (k − 1)! is the gamma function

θ = 1 / λ is the mean number of events per time unit, where λ is the mean time between events. For example, if the mean time between phone calls is 2 hours, then you would use a gamma distribution with θ=1/2=0.5. If we want to find the mean number of calls in 5 hours, it would be 5 1/2=2.5.

x is a random variable

Cumulative density function: The gamma cumulative distribution function is given by

where

if k is a positive integer, then Γ(k) = (k − 1)! is the gamma function

Moment generating function: The gamma moment-generating function is

Expectation: The expected value of a gamma distributed random variable x is

Variance: The gamma variance is

Applications

The gamma distribution can be used a range of disciplines including queuing models, climatology, and financial services. Examples of events that may be modeled by gamma distribution include:

The amount of rainfall accumulated in a reservoir

The size of loan defaults or aggregate insurance claims

The flow of items through manufacturing and distribution processes

The load on web servers

The many and varied forms of telecom exchange

The gamma distribution is also used to model errors in a multi-level Poisson regression model because the combination of a Poisson distribution and a gamma distribution is a negative binomial distribution.

Example

Suppose you are fishing and you expect to get a fish once every 1/2 hour. Compute the probability that you will have to wait between 2 to 4 hours before you catch 4 fish.

One fish every 1/2 hour means we would expect to get θ = 1 / 0.5 = 2 fish every hour on average. Using θ = 2 and k = 4, we can compute this as follows:

Normal Approximation to Gamma distribution

Note that if \( \{X_1,X_2,X_3,\cdots \}\) is a sequence of independent Exponential(b) random variables then \(Y_k = \sum_{i=1}^k{X_i} \) is a random variable with gamma distribution with the following shape parameter, k (positive integer indicating the number of exponential variable in the sum) and scale parameter b (which is the exponential parameter). By the central limit theorem, if k is large, then gamma distribution can be approximated by the normal distribution with mean \(\mu=kb\) and variance \(\sigma^2 =kb^2\). That is, the distribution of the variable \(Z_k={{Y_k-kb}\over{\sqrt{k}b}}\) tends to the standard normal distribution as .

For the example above, \(\Gamma(k=4, \theta=2)\), the SOCR Normal Distribution Calculator can be used to obtain an estimate of the area of interest as shown on the image below.